Small cars, two-wheelers set for a cheaper ride

Two-wheelers, small cars and mini sport utility vehicles (SUVs) will emerge biggest beneficiaries of the roll-out of the goods and services tax (GST), as the segment will adopt a much lower rate of tax than the prevailing rate.

While the final tax rate is yet to be decided, what is given is that it will be lower than the nearly 24 per cent tax the segment experiences presently. If GST is finalised at 18 per cent, there will be a reduction of Rs 15,000-45,000 on cars and SUVs, according to rough estimates.

Maruti Suzuki, Tata Motors and Hyundai stand to gain the maximum, given their large portfolio of products in the sub-4 meter segment. The government defines small cars as those, which are less than 4,000 mm, with petrol engines not more than 1,200 cc and diesel engines not more than 1,500 cc.

“We welcome the passage of the forward-looking reform, which will augur well in the long term for uniform economic progress across the country. In addition to simplifying the tax structure and administration, it will accelerate movement between producing and consumption locations,” a Tata Motors spokesperson said.

Following a series of reforms in areas such as safety and emission, prices of all passenger vehicles are set to skyrocket over the next four years. Mandatory fitment of safety features like airbags, stringent crash tests as well as upgradation to new emission standards will push the cost of vehicles. Carmakers fear this may negate the gains from tax reduction under GST.

However, other gains arising from allied areas such as components, logistics and supply-chain inventory may help to further extend the gains.

Sumit Sawhney, country CEO and managing director, Renault India, said, “The cost for the logistics and supply chain inventory will be curtailed by almost 30-40 per cent, the benefits of which are expected to be passed on to the consumers”.

There are expectations that all other cars, which do not fall in the ‘small car’ category, will be slapped with the 40 per cent tax slab under GST. This will be negative for companies like Mahindra & Mahindra, Honda, Toyota Kirloskar, Volkswagen, to name a few, whose products will see price rise.

Two-wheeler manufacturers can rejoice, as their products, too, will fall in the lower tax regime. There could be a direct reduction of six to seven per cent in taxes under GST, translating into direct savings of Rs 2,200-8,700.

"It is a big positive for the industry. This will certainly give a significant boost to demand, but it all depends on what the tax rate will be (eventually). It is too early to give any indication as to how much the volume jump will be without knowing the reduction in tax," said, SG Murali, chief financial officer, TVS Motors.

With GST clearing its most crucial hurdle, companies say they can now focus on their business rather than on tax compliances. "Manufacturers can now concentrate on their main business of production, without the complexity of multiple tax compliances," said VS Parthasarathy, chief financial officer, Mahindra Group.